Correspondence with Godfrey Bloom and Ian Dexter on flat-rate taxes

I am sure you are right that in the ’80s it was the lowering of tax rates that generated growth. Invariably, through history, whenever taxation has been experienced as burdensome, the lowering of the rate has increased the yield.

But that leaves the question of where that rate should be pitched. If you have multiple rates do you lower them all? Or only those seen as burdensome, sparking allegations of unfairness from one segment or another? Or just the most oppressive higher rates, inviting opprobrium as having favoured the rich? Any tax other than a single-rate tax will self-destruct. I hear what you say about “judicious” progression, but that merely invites subsequent tampering – something that simply cannot arise with the single rate.

Perhaps there is a clue in your reference to those who “through no fault of their own do not have the luck to be wealthy”. Designers of a tax system should leave luck out of the equation, nor assume that those who have wealth are “lucky” rather than industrious.

As to appealing to voters, there are lots of ways of doing this – but it’s been a long time since this has been achieved by appealing to reason rather than populist sentiment, even in the guise of fairness. A flat rate is known as proportional for the very reason that it is neither progressive nor regressive in its incidence – both of the latter two involve “bands”. A flat rate is proportional because the proportion (or percentage) of earnings/ profits/ revenue taken in taxation is constant. It is always the same proportion.

Emile Woolf
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The main advantage of a flat-rate tax (otherwise known technically as a “proportional” tax) is that it is generally a low rate. There would be little point in having a high flat-rate tax. Mr Dexter acknowledges that the advantages of the low rate are incontrovertible. Our respective perceptions of how low is “low” are of course subjective, although there have been studies on the principle of the Laffer curve in relation to optimising yield.

Regarding “oligarch” behaviour and the undeserving wealthy, I agree with Mr Dexter that any tax system which institutionalises gross inequality would be an electoral turn-off. But we must resist the temptation to abandon a principles-based system because of what is, in essence, a grotesque aberration that needs to be dealt with as such. Most oligarchs “got” (rather than “made”) their millions by stealing state assets and, despite the trappings of acquired respectability, are criminals of the deepest dye. Their presence here should not be a matter to be dealt with through the tax system.

To endow a system with a widespread perception of “fairness” it is necessary to establish correspondence between effort and reward, and that requires the abandonment of “bands”. Entrepreneurial effort that leads to high earnings should not be made to suffer the disincentive of differentially progressive tax rates. That is inherently unjust and fails to recognise that the higher earner pays more taxes anyway, yet levied at the same rate as the lower earners. Indeed, differentials in the form of “reliefs” and “allowances” should be removed from the PAYE system (in favour of direct payments, like state pensions) in order to facilitate a flat-rate tax for employees.

Mr Dexter suggests a small element of tax-rate progression in order to win votes from Labour that would not otherwise go to UKIP. Strategy and tactics are not my field but the palpable simplicity and transparency of a strictly proportional system has considerable inherent appeal.

Adoption of such a tax would not be tantamount to copying the former Communist countries of Eastern Europe. They simply adopted the flat tax from a clean slate and it has generally proved beneficial, as it has in over 20 other examples.

I have not addressed the other interesting comments made by Mr Dexter regarding the necessity for the PAYE system to remain in place in order to raise taxes. If it is in fact a tax borne by the employer (no employee having ever seen his/ her gross pay) then the time will come for the illusions to be laid bare!

I am presenting tax policy at Exeter and very much look forward to meeting you. I have been working with Emile Woolf the eminent international government tax advisor. You might like to visit his website.